Financially Empowering the Growing Non-Traditional Workforce

By Anup Chamrajnagar and Dave Matter, Point72 Ventures, Financial Services

At Point72 Ventures, we’ve always been active investors in financial infrastructure empowering a new world of flexible, essential, and on-demand financial services, and we see the new gig/freelancer economy as a natural extension to this thesis. In this piece, we dive into the trends that make this part of the US workforce increasingly prevalent, what pain points need to be solved by financial technology, and where we’ve gotten involved so far.

What is driving the growth and prevalence of the new freelancer economy?

Less than a decade after popular services like Uber, Lyft, Airbnb and Instacart started to redefine our notion of convenience, the “gig economy” has become an umbrella term for the growing number of digital-age contractors. Although these tech platforms have brought the idea of freelancing into the media spotlight, they only represent a small fraction of the overall freelancer economy, which continues to be most prevalent in areas like arts/design, content creation, construction, household/personal services, transportation, and healthcare.

Today, about 36% of all US workers now participate in the gig/freelancer economy through either their primary or secondary jobs. At the current rate of growth, it is projected that by 2027, 86.5m people will be working as freelancers, amounting to more than half the total US workforce. This trend is staggering, but it was inevitable. From 1997–2015, employment growth in the freelancer sector grew at an average rate of 2.6% YoY, while the traditional payroll employment sector grew at 0.8% YoY. Much of that growth came recently, with the number of US freelancers growing by 15% within the last decade. This decades-long rise of the freelancer/gig economy has been powered by three primary demographic groups:

• Immigrants: Finding work in a new country has always been a challenge. Many immigrants come to the US with little money and fewer connections. Combine those challenges with a language barrier and a skills gap, and their options can be limited. The gig economy has lowered the barriers that immigrants have historically faced, and has catalyzed multiple opportunities for them to quickly enter the work force.
• Baby Boomers and Gen-X: The average age of independent contractors is 46, as opposed to an average age of 35 for the short-term (<1–1.5 years) typical full-time W-2 employee. As the average retirement age continues to rise, and more Boomers/Gen-X reach this threshold and want or need to keep working, it is likely they will continue expanding the ranks of the freelancer workforce.
• Millennials and Gen-Z: With more and more young people identifying as modern-day “digital nomads,” they are increasingly seeking out lifestyles where they control their own workload, location, and compensation. With “mobile university degrees” like computer science and data science increasing by double-digit percentages every year, we are likely to see more young people available for ad-hoc and short-term design, programming, and engineering roles that don’t necessitate expensive full-time onboarding processes for companies.

What pain points need to be solved by financial technology today?

With the non-traditional workforce rapidly growing and playing a greater role in the US economy, we have taken a deeper look into potential financial pain points and found three main buckets where this group lacks products or support and can benefit from improvements in fintech: financial safety nets, financial products, and administrative tools.

Financial Safety Nets

• Tax Withholding/Reporting and Cash Flow: Many first-time gig workers/freelancers don’t know that they have to put aside part of their revenue check as income tax. Even if they do, they are not sure how much. Independent workers frequently suffer from volatile and unpredictable cash flow all year, and often don’t allocate the proper amount of cash for taxes.
• Benefits/Retirement/Investment: In the US, self-employed workers are not covered under any nationwide retirement plan, healthcare coverage, or national fund contribution plan, and often don’t have the proper guidance or tools to register with insurance or retirement plan companies..

Financial Products

• Lending and Credit: Validation of 1099 income is often more challenging and latent than W-2 income. This often results in fewer lenders willing to grant them short-term credit, salary loans, or the quick mortgage approvals needed to make competitive offers on home purchases in hot housing markings.
• Business Bank Account: ~78% of gig workers/freelancers don’t have a separate business bank account, and many keep all of their personal and business expenses on the same account, often resulting in confusing expense profiles and hard-to-track financial statements.

Administrative Tools

• Full Operating System/Core Workflow: A majority of gig workers/freelancers still use manual systems for scheduling, pricing, documentation, bookkeeping, and accounting (if at all). All of these are hard to track, consume a lot of time, and the eventual conversion rate on finding clients/booking sales can still be low.

We are not the first ones to recognize these crucial issues, but they persist on being problems because they are difficult to solve. Thankfully, the recent rise of many startups (i.e.: Steady, Catch Benefits, Anna, Wise, Upwork, Lance, Azlo, Oxygen, Everlance, Joust) and software solutions (Zoho, Xero, Quickbooks) are succeeding in helping freelancers with some of these pain points, in particular when it comes to providing better administrative tools and access to some financial products that weren’t available to this segment before. However, access to a full suite of traditional financial safety nets/products for this workforce is still lacking in some respects.

Today, the freelancer services landscape is separated into several categories that each handle various workflows for the typical freelancer. For example, gig/freelancer “marketplaces” like Freelancer, Steady, YouTube, Etsy, Uber, Taskrabbit, etc. are one category, while freelancer operating/self-administration systems are another. Some large gig companies like Uber have tried to build financial services in-house and failed because of the high cost and complexity of doing so. Similar to Uber, there are several gig/freelancer platforms who want to offer a fuller stack of financial services to their customers but can’t build the solution in-house for a variety of reasons (i.e.: too expensive, would take too long, inadequate resources, etc). As a result, many of these platforms have expressed interest in leveraging third party services to quickly offer various financial products on their platforms so they can spend more time refining their core value propositions, thus being able to offer a holistic financial product stack without sacrificing anything in their core offerings.

image via unsplash

Where have we gotten involved so far?

We at Point72 Ventures believe that the most successful B2B players in the space will be the ones that enable other traditional employers, gig/freelancer economy marketplaces, freelancer operating systems, benefits, and core workflow platforms to provide the tailored financial products and safety nets that many 1099-income workers demand today. We have made three investments so far that express our conviction in this space:

• Abound: Our newest investment is in Abound, a modular 1099 benefits API starting with tax withholding and payments. The company’s solution today is a toolkit and series of APIs that can be embedded within fintech, financial infrastructure provider, freelancer marketplace, and gig worker/freelancer platforms to calculate every worker’s necessary tax documentation and escrow, and to pay their estimated taxes. The company plans to use this same technology to innovate on other tax-advantaged financial safety nets like healthcare benefits, HSA, and 401(k)s/IRAs. We believe that by focusing on such a large pain point like taxes, the company has taken the right first approach to building a larger all-encompassing benefits API for any platform that services the freelancer economy.
• DriveWealth: DriveWealth powers the brokerage and fractional trading capabilities of any platform that wants to incorporate portfolio management into their platforms. Their infrastructure is plugged into many popular fintechs today, including MoneyLion, Revolut, Hatch, and Square’s Cash App, and is constantly expanding into underpenetrated segments like the freelancer economy. DriveWealth’s health savings account team is equipping many HSA administrators with the tools needed to run full-stack brokerage capabilities as a part of a hybrid “healthcare expenses and long-term investing” account.
• Extend: Extend is a virtual credit card distribution platform where businesses and fintechs can easily issue virtual “sub-cards” off of their existing credit card. Many freelancers have to front their own expenses when performing their job (i.e.: sub-contractor, food delivery), and often struggle to get properly reimbursed in a speedy fashion, resulting in cash flow issues. With Extend, businesses that employ a freelancer workforce can issue cards that can easily track these expenses, reducing potential liabilities.

We continue to believe that the future of financial services involves clever, contextual distribution of products and solutions through the platforms that solve real problems for their target customers. We are excited to partner with these teams as they continue to expand the way they serve gig workers, and we will continue to seek out more companies that are creating solutions for the new workforce.

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This is not an advertisement nor an offer to sell nor a solicitation of an offer to invest in any entity or other investment vehicle. The information herein is not intended to be used as a guide to investing or as a source of any specific investment recommendation, and it makes no implied or express recommendation concerning the suitability of an investment for any particular investor. The opinions, projections and other forward-looking statements are based on assumptions that the authors’ believe to be reasonable but are subject to a wide range of risks and uncertainties, and, therefore, actual outcomes and future events may differ materially from those expressed or implied by such statements. Point72 Private Investments, LLC or an affiliate may seek to invest in one or more of the companies discussed herein.